The Death of Advertising

And what will rise from its ashes.

Subtlety.

“The biggest advertisers on television are cars; retailers; CPG companies, all of which have business models that are fundamentally threatened by the internet. These are all companies that are mass market, but the offline mass market relative to the internet is a middle market, and the internet destroys mid-size businesses. It rewards niche businesses that have high differentiation and can charge a premium, and it rewards massive scale businesses that can operate internationally, at a scale unimaginable by even these giant companies. And one wonders, when and if this advertising shifts away from television, how much of it is going to be left?” — Ben Thompson, Exponent Episode #104: Snap’s Gingerbread Strategy

The presence of advertising in our daily lives is akin to that of water in the life of a fish. It’s everywhere, and yet often, we remain oblivious to it, at least consciously; blind to the brightly colored billboard on the highway, or the flashing neon lights outside of a roadside motel. Our conscious minds, however, were never the targets of traditional advertising. The most effective advertising campaigns of the last fifty years were the ones we eventually forgot were there — the McDonald’s television ads delivered to us as children; the Coca-Cola slide in left field at AT&T park in San Francisco; the slogans that somehow made insurance more than a hedge against disaster. (“You’re in good hands”, “Nationwide is on your side!”, “15 minutes could save you 15% or more on car insurance”, “Esurance — insurance, for the modern world”, “Like a good neighbor, State Farm is there!”, to name a few. Also, I recalled those without external aid — such is the effectiveness of long-term, large-scale advertising campaigns.)

Ever realize this was an ad?

In the old world, there was no effective way to target individuals searching for niche products, so the companies that succeeded — the household names, so to speak — offered products that appealed to broad swaths of people, and advertised by reaching thousands, and in many cases, millions of people at once (see: Super Bowl and radio ads). The companies who ran successful advertising campaigns through these mediums, then, tended to be of a certain ilk, whether restaurant chains, car brands, department stores, insurance agencies, or brands under the umbrella of a larger consumer goods company.

Enter the modern era, and the internet has flipped the traditional retail model — one characterized by massive investment into retail locations and brand advertising — on its head. Distance between buyer and seller no longer constrains sales — a consumer in Japan could just as easily obtain a watch manufactured in Detroit as a consumer in Detroit could obtain a Sake produced in Japan. The internet has given buyers and sellers unprecedented access to one another; it has never been easier for a buyer to find a seller who has what they need, just as it has never been easier for a seller to find a user who needs what they have.

Google and Facebook ads are a microcosm of this effect. No longer is the cost of individual consumer acquisition so high that reaching a million consumers at once is the only effective way to advertise. Now, through Google and Facebook, niche businesses can target specific individuals whose data determines that they are prime candidates for said niche product or service. Bevel, a company that produces a suite of shaving products specifically for black men, would have been hung out to dry in the old world of advertising, because the majority of people their ads would’ve reached would’ve found them useless, or irrelevant. Now, however, Bevel can target its users with Google ads under certain keywords — for instance, when I type in “razors for black men” on Google, Bevel is the first promoted result. Facebook, too, allows Bevel to target users by age, racial demographic, and whatever other factors Bevel determines as indicative of interest in spending money on a shaving kit specifically for black men. If I were a black man in my mid-20s, had a Facebook account, and had searched for razors somewhere online before, Facebook’s algorithm would likely begin serving me ads for Bevel products. Once they did, and once I realized that those ads were for something that could improve my life, I would click one, which would cost Bevel a few cents on the dollar, make a purchase, and most importantly, do so immediately and regardless of my geographic location.

In the end, what Bevel would have paid to acquire my hypothetical business would have been a fraction of a what a company like McDonald’s did to eventually acquire my actual business, twenty years ago, as it peppered me with constant television and radio ads that allowed me to catch my first glimpse of the golden arches, or hear the words “I’m lovin’ it!” echo throughout my living room for the first time. McDonald’s was smart enough to realize that given the advertising avenues they had to work with, and the homogeneity of the product they were selling, the only way to succeed was to invest deeply into mass market targeting, thereby pursuing long-term and large-scale consumer retention, albeit with a low per customer profit. Today, however, Bevel can target any person with an internet connection based on their user data, obtain a new customer immediately, regardless of where they are, and extract more money per transaction from that customer than a huge corporation like McDonald’s ever could from theirs — and they can do it at a fraction of the cost big brands once paid. This is the beauty of the internet.

This doesn’t mean there isn’t still value in employing the shotgun approach, defined by blasting ads to huge audiences and seeing what sticks. Savvy marketing teams from companies like Coca-Cola and McDonald’s have used it to ensure that today, there are few soda machines in the world that do not contain Coke, and likely even fewer adults in the United States who do not recognize the golden arches as a symbol of consistency. Similarly, every time I walk through an airport, looking for something to eat, I end up at McDonald’s, not because it’s the best, but because it’s what I know — and I know it for no other reason than that its brand has been subliminally imprinted in my brain to such a point that it has become the default option for food when I don’t know where to go, or simply don’t want to waste time thinking about it. This is the power of branding.

To this day, McDonald’s advertising campaigns rest on reaching massive, heterogenous audiences, because their products appeal to the median consumer. Watching McDonald’s television ads in which five millennials, all of different racial backgrounds, but none deeply attached to one; all lean and attractive, but none so much so as to be intimidating, mill about, dancing and smiling while consuming small portions of McDonald’s food, is a reminder that McDonald’s isn’t trying to appeal to some of us — they’re trying to appeal to as many of us as they can, and reaching the median consumer does just that. Politicians use this strategy, too, and the ones who do it best get elected. Should they focus too heavily on fringe voters, they risk not garnering enough votes. The same applies to companies of the old world — there was little precedent for appealing to a niche market,¹ and few means to do so. Thus, the successful companies of the old world, like the successful politicians of both that world, and today’s, appealed to the median, because there was no other way to win.²

To elect a winner in the political market, voters choose with their vote. In a goods market, however, voters choose with their wallet. And while it is hard to imagine a political world not governed by the wishes of the majority,³ it is easier, given the current online landscape, to imagine a goods market no longer governed by the tastes of the “median voter” — a goods market no longer predicated on shotgun approaches to advertising, but rather on approaches that appeal to specific subsets of consumers — those who are willing to pay premiums for niche, high-quality products, like Bevel. In the old world, massive companies could rely on the moat of imperfect information to afford them long-term consumer loyalty, even with mediocre, one-size-fits-all products. Now, in a world in which information is becoming less and less imperfect all the time, and the costs of advertising are ever decreasing per the increased word of mouth facilitated by avenues like YouTube and Facebook, the advantage enjoyed by large companies is fast dissipating. Gillette is an example. For decades, they sold razors at a premium, because they sat behind moats of massive advertising and distribution costs. The internet changed everything. Suddenly, a new competitor — Dollar Shave Club — was able to advertise cheaply through savvy social media use that generated amplified word of mouth, and distribute their product for a fraction of what companies like Gillette were charging, given their lack of a constraining retail presence or large investment into brand advertising. Dollar Shave Club was eventually acquired for one billion dollars by Unilever — a good indicator that their model is not only sustainable, but replicable — across all industries.

Dollar Shave Club’s success indicates that the prevalence of shotgun advertising will fade over the decades to come. Companies that serve the masses will be replaced by companies that serve niches, because the latter will take advantage of the vastly decreased distribution costs and effective avenues for grassroots marketing that the internet provides. As this happens, and information about both buyers and suppliers becomes more and more perfect, the advantages enjoyed by producers of homogenous products like the Big Mac and Coke will dissipate, and their products will lose market share to more targeted, higher quality products that take advantage of unique, niche markets that were never able to be recognized, or more correctly, monetized, in the old world of advertising. The internet, the data it generates, and the companies that own and utilize that data best, will be the driving forces behind the monetization of niches.

“You want to know who you really are? asks Dataism. “Then forget about the mountains and museums. Have you had your DNA sequenced? No?! What are you waiting for? Go and do it today. And convince your grandparents, parents, and siblings to have their DNA sequenced too — their data is very valuable for you. And have you heard about these wearable biometric devices that measure your blood pressure and heart rate twenty-four hours a day? Good — so buy one of those, put it on and connect it to your smartphone. And while you are shopping, buy a mobile camera and microphone, record everything you do, and put it online. And allow Google and Facebook to read all your emails, monitor all your Likes and clicks. If you do all that, then the great algorithms of the Internet-of-All-Things will tell you whom to marry, which career to pursue, and whether to start a war.” — Yuval Noah Harari, Homo Deus

The perfection of data will, eventually, give rise to a world in every consumer can be paired up with goods that meet their biological tendencies, rather than their consumptive ones. This world will also be devoid of branding, because in a world that relies on perfect information, there will be no need for branded trust. The cheaper of two identical goods will always and everywhere be purchased, as opposed to what happens now, when a consumer pays more for Motrin, the brand, than Ibuprofen, the drug, even though they’re the same thing. Once perfect information becomes a reality, there won’t be just a few over-the-counter meds to alleviate pain, rather there will be hundreds, or even thousands depending on the specific needs of the niche markets. The purpose of advertising in this world, then, will be to pair niche consumers, whose needs were never profitable enough to be met, with niche products, whose production was never profitable enough to be realized.

Given all of this, advertising as we’ve always known it — large-scale campaigns predicated on instilling subconscious intuition in consumers — will die. What will rise from its ashes be unlike anything we’ve seen before. It will not condition us to select from a menu of mediocrity, as it has done for centuries. Rather, the algorithms buried within the walls of companies like Google and Facebook will deterministically present us with our best options for everything from dinner to marriage, given the troves of user data they have at their disposal. At first, consumers may rebel, like they did with the advent of GPS in cars, or online shopping.⁴ But as they realize that they are better served by allowing algorithms to take care of the decisions they once relied on their own autonomy to make, they will make the shift. It will not happen overnight, but it will happen.

This new world will be marked by a monumental shift away from branding, which is already happening, a shift away from search, which is about to happen, but most important, and perhaps most unsettling, a shift away from trust in the user as the final indicator of their own desire. As we make this shift, and move towards a world in which data — and the mastery of its use — is king, ads will become deterministic. The companies that define this future will master the use of consumer data to inform ad delivery, and as they continue to amass user data, both their advertisements — and in turn, their data — will improve in tandem, until both are perfect. As this happens — and it will be a process, given that new consumers enter the world by the hundreds of thousands every day — our world will become one in which every consumer will be deterministically paired both with what they want, and what they need. In this new world, whether there will even be a difference is far from clear.

Acknowledgements: Thanks to David Perell for constantly teaching me about the tech industry, and improving pieces like this immensely. Thanks also to Yuval Noah Harari, Ben Thompson, and James Allworth for inspiring the thoughts that lead to articles like this.

Footnotes:

¹ “Niche” defined as a group that wouldn’t have been profitable to target with a certain product in a world in which TV and radio ads were king.

² Some might argue that Bernie Sanders is an exception to this rule — it wouldn’t appear that Sanders was attempting to appeal to “the middle” — but this is to misunderstand the idea of the median voter. Sanders ran a visionary campaign, but his near victory in the democratic primary came only because his vision literally shifted the median from one section of the voting populace to another. To his credit, he was the first in a long time to do this. Unfortunately for him, he didn’t shift it quite far enough. Trump’s eventual win was due to a combination of the Sanders strategy and the McDonald’s strategy. He ran a campaign based on a vision, however retrograde, that aligned with the views, and more importantly, the frustrations, of a long-forgotten median within the American voting populace. Almost more importantly, however, his message was disseminated among voters in a way that almost no political message ever has been, except in his case, he didn’t have to spend the money to do it. The media, regardless of how they framed it, pushed Trump’s message to those who would watch, and got him continual exposure. Voters in former coal mining towns in West Virginia, then, when they reached the primary polls, may never have heard of Marco Rubio, or Rand Paul. You can bet, however, that they had heard of Donald Trump, and his message: “Make America great again.” In four words, Trump captured the frustration, and in turn, loyalty, of a group that had had long believed themselves forgotten. With nothing more than the press of a key, or the scratch of pen, they afforded us the opportunity to remember.

³ Because someone will say it — the presidential election process within the United States is not technically governed by the majority. I know.

⁴ GPS in cars used to be awful. It’s now used everywhere, and it rocks.